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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce


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Volume 24 (2020)

“Animal spirits” and bank’s lending behaviour, a disequilibrium approach

Carl Chiarella / Corrado Di Guilmi / Tianhao Zhi
Published Online: 2019-03-12 | DOI: https://doi.org/10.1515/snde-2016-0095

Abstract

The paper analyses from a disequilibrium perspective the role of banks’ “animal spirits” and collective behaviour in the creation of credit that, ultimately, determines the credit cycle. In particular, we propose a dynamic model to analyse how the transmission of waves of optimism and pessimism in the supply side of the credit market interacts with the business cycle. We adopt the Weidlich-Haag-Lux approach to model the opinion contagion of bankers. We test different assumptions on banks’ behaviour and find that opinion contagion and herding amongst banks play an important role in propagating the credit cycle and destabilizing the real economy. The boom phases trigger banks’ optimism that collectively lead the banks to lend excessively, thus reinforcing the credit bubble. Eventually the bubbles collapse due to an over-accumulation of debt, leading to a restrictive phase in the credit cycle.

Keywords: animal spirits; contagion; financial fragility; pro-cyclical credit cycle

JEL Classification: E12; E17; E32; G21

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About the article

Published Online: 2019-03-12


Citation Information: Studies in Nonlinear Dynamics & Econometrics, 20160095, ISSN (Online) 1558-3708, DOI: https://doi.org/10.1515/snde-2016-0095.

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